Allison Diaz

Bus- 219
Assignment 1

Chapter 1:
9. What is limited liability, and who benefits from it?

Limited liability is when the owners of a corporation are not personally liable for its obligations.
Both, the owners and shareholders may benefit from this because is the company goes under or
fails, the owners aren’t liable for the remaining debt that the company hasn’t paid off.
Shareholders benefit also benefit from this as to they cannot be held personally responsible for
the corporation’s debt and their loss is restricted to their investment.

33. Which of the following forms of compensation is most likely to align the interests of
managers and shareholders?
a. A fixed salary
b. A salary linked to company profits
c. A salary that is paid partly in the form of the company’s shares

Chapter 2:
5. You are a beginning investor with only $5,000 in savings. How can you achieve a widely
diversified portfolio at a reasonable cost?

To achieve a widely diversified portfolio at a reasonable cost its best to invest in mutual funds. A
mutual fund is an investment company that pools savings of many investors and invests in a
portfolio of securities. Mutual funds offer investors low cost diversification and professional
management which makes it more efficient.
Chapter 3:
3. Construct a balance sheet for Sophie’s Sofas given the following data. What is the
shareholders’ equity?
Sophie’s Sofas
Balance Sheet
Assets
Current Assets Liabilities and Shareholders’ Equity
Cash 10,000 Current liability
Inventory 200,000 Account payable 17,000
Account receivable 22,000
Total current assets 232,000 Long term debt 170,000
Total liabilities 187,000
Fixed Assets
Store & property 100,000 Shareholders’ Equity 145,000
Total Assets 332,000

Total Assets – Total Liabilities = Shareholders’ Equity

332,000 – 187,000 = 145,000

13. Will the following actions increase or decrease the firm’s cash balance?
a. The firm sells some goods from inventory
Increase
b. The firm sells machinery to a bank and leases it back for a period of 20 years
Increase, then deceases
c. The firm buys back 1 million shares of the stock from existing shareholders
Decrease